The next four months may provide a unique opportunity for estate planning. The federal gift tax exemption had never exceeded $1 million until 2011. Currently, every individual is entitled to a $5.12 million gift tax exemption. A federal estate and gift tax rate of 35% is imposed on an estate exceeding $5.12 million. On January 1, 2013, the exemption will revert to $1 million unless Congress enacts new legislation. If the law reverts to a $1 million exemption, Congress is likely to act to grandfather gifts made in 2012 up to the $5.12 million exemption amount.
Additionally, married couples are entitled to “portability,” which allows a surviving spouse to use the unused estate tax exclusion of the first spouse to die against gifts and transfers upon death. Thus, a married couple may currently pass $10.24 million of assets to their beneficiaries with no federal estate tax. If no further legislation is enacted prior to the end of 2012, portability will no longer be available.
Portability allows a substantial amount of assets to pass from one spouse to the other. The uncertainty surrounding the estate tax laws favors the creation of estate plans that provide a surviving spouse with an option to invoke portability if the law is still in effect, or to fund a traditional credit shelter trust by disclaiming qualified assets.
It may be advisable to wait until closer to year’s end to determine if Congress will act to change the estate and gift tax laws before making an irrevocable gift. Trusts may be created and funded now, with the ability to make them irrevocable before the end of the year to ensure that the trust assets do not incur estate and gift taxes.
For more information as to how you may best take advantage of the current estate and gift tax laws, please contact a member of Cooper Levenson’s Estate Planning group.